If, before the end of the year, I gifted $50k of appreciated stock from Vanguard to my account at the Vanguard Charitable Endowment Fund (in order to get a tax write off in 2012 but with the ability to distribute the funds to charities over time) and the same day I bought $50k of the same stock in my Vanguard account to replenish what was given way, would that be considered a wash sale?

No wash sale, but you should have instructed Vanguard to gift the low-basis shares (or FIFO lot, in this case). Otherwise you could have a problem of gifting the higher basis shares you had just purchased OR cost averaging the shares just purchased with the lower basis shares.

troysapp wrote:No wash sale, but you should have instructed Vanguard to gift the low-basis shares (or FIFO lot, in this case). Otherwise you could have a problem of gifting the higher basis shares you had just purchased OR cost averaging the shares just purchased with the lower basis shares.

I haven't actually performed this transaction yet, but I believe I've set all my vanguard accounts to average cost method. Not sure if I can instruct them to gift particular shares at this point.

RenoJay wrote:I haven't actually performed this transaction yet, but I believe I've set all my vanguard accounts to average cost method. Not sure if I can instruct them to gift particular shares at this point.

If you have made no sales, then you can change the cost basis accounting method to anything you want. One is not locked in to a particular method because of an old question from Vanguard.

RenoJay wrote:I haven't actually performed this transaction yet, but I believe I've set all my vanguard accounts to average cost method. Not sure if I can instruct them to gift particular shares at this point.

If you have made no sales, then you can change the cost basis accounting method to anything you want. One is not locked in to a particular method because of an old question from Vanguard.

The key is as you mention, you cannot have sold ANY shares of this particular fund in your account, because once you have started with one cost accounting method in a fund you cannot change it. However, if the sale is a single stock (as compared to mutual funds) then the rules are a little different, as there is no such thing as "average cost" when dealing with individual stocks.

FinancialDave wrote:The key is as you mention, you cannot have sold ANY shares of this particular fund in your account, because once you have started with one cost accounting method in a fund you cannot change it. However, if the sale is a single stock (as compared to mutual funds) then the rules are a little different, as there is no such thing as "average cost" when dealing with individual stocks.

P.S. Actually, that wasn't even the law 10 years ago as you could always change from Specific ID to FIFO and back again any time you wanted.

P.P.S. It's actually a little more technical than that. The new regulations state that a change of basis method is not a change of accounting method (in case you really meant accounting method).

the final regulations provide that a basis determination method for stock is not a method of accounting and a change ina method of determining basis for stock is not a change in method of accounting to which sections 446 and 481 apply.

Last edited by sscritic on Tue Nov 27, 2012 9:15 pm, edited 1 time in total.

FinancialDave wrote:The key is as you mention, you cannot have sold ANY shares of this particular fund in your account, because once you have started with one cost accounting method in a fund you cannot change it.

P.S. Actually, that wasn't even the law 10 years ago as you could always change from Specific ID to FIFO and back again any time you wanted.

P.P.S. It's actually a little more technical than that. The new regulations state that a change of basis method is not a change of accounting method (in case you really meant accounting method).

the final regulations provide that a basis determination method for stock is not a method of accounting and a change ina method of determining basis for stock is not a change in method of accounting to which sections 446 and 481 apply.

Yes, I did mean change in basis (not accounting method) - but here again the IRS gets a little more technical by using the term "Revocation." In other words, once you have made an election the technical term is you have to revoke it, however here is the actual wording on WHEN it can be revoked:

(iii) Revocation of election. A taxpayermay revoke an election under paragraph(e)(9)(i) of this section by the earlier ofone year after the taxpayer makes theelection or the date of the first sale

The result of the above is that yes you can change your method of basis calculation anytime provided you have not made an actual election, longer than a year ago, nor your first sale.

The reason I suspect is that once you sell some stock and use the average method, there is really no way to go back to a FIFO calculation, as the basis would be off.

The term revocation is not the same as the term change. A change is allowed.

(iii) Revocation of election. A taxpayer may revoke an election under paragraph (e)(9)(i) of this section by the earlier of one year after the taxpayer makes the election or the date of the first sale, transfer, or disposition of that stock following the election.

Which is followed in the very next section by

(iv) Change from average basis method. A taxpayer may change basis determination methods from the average basis method to another method prospectively at any time.

You didn't read far enough.

As to how to calculate the basis, that is covered in the regulations. Your basis is the basis you had just before the change of method. In other words, if you have used average basis for some shares, when you switch to FIFO the shares have the basis calculated when you averaged, not what you paid for them.

Unless paragraph (e)(9)(iii) of this section applies, the basis of each share of stock to which the change applies remains the same as the basis immediately before the change.

Regulations have sections. Each section applies to what it applies to. The section on average basis does not apply to stocks, unless the stocks are in a DRIP. The section on average basis applies to regulated investment companies, aka mutual funds.

I don't want to sound too harsh, but you could try reading it for yourself. But I will help you read one last time:

(e) Election to use average basis method—(1) In general. Notwithstanding paragraph (c) of this section, and except as provided in paragraph (e)(8) of this section, a taxpayer may use the average basis method described in paragraph (e)(7) of this section to determine the cost or other basis of identical shares of stock if—(i) The taxpayer leaves shares of stock in a regulated investment company (as defined in paragraph (e)(5) of this section) or shares of stock acquired after December 31, 2010, in connection with a dividend reinvestment plan (as defined in paragraph (e)(6) of this section) with a custodian or agent in an account maintained for the acquisition or redemption, sale, or other disposition of shares of the stock; and(ii) The taxpayer acquires identical shares of stock at different prices or bases in the account.

Custodian = Vanguard; shares of stock in a regulated investment company = shares of a fund.

#48 & 49 spell out pretty much what you have already said -- however you are mis-interpreting what the IRS is saying (IMHO) and I have done some work for the IRS so I understand that every word in their documents is important.

In this case the word "prospectively" is the key. In case you are not aware, in this context it means in the future.

Requoting from the FAQ:

A taxpayer may revoke an average basis election by the earlier of one year from the date of making the election or the first sale or other disposition of the stock following the election. After a revocation, the taxpayer’s stock basis is the basis before averaging. However, a taxpayer may change from the average basis method to another permissible method prospectively.

In other words looking at an example:Investor buys 1000 shares of a mutual fund, elects to use average cost method, sells 100 shares. He can no longer sell the remaining 900 shares by any method other than the one he has elected -- because he can not revoke the average method.

Certainly he can change his method on any new shares he has bought (because he has not done an average calculation on those shares.) This is what "prospectively" means.

I think we agree on the basis; once averaged, the basis remains as computed when averaging. However, part of using average basis is that shares are sold FIFO. Thus you could switch to FIFO and sell exactly the same shares using the same basis, i.e., for those shares FIFO is average basis. Where we disagree, is that I believe you can use Specific ID to sell the second oldest share you own rather than the very oldest. Or maybe you don't agree that you can sell old "average basis" shares using FIFO. T. Rowe Price thinks you are wrong.

48. How and when is the average basis method elected?Starting in 2012, a customer elects the average basis method by notifying his or her broker of the election in writing. A taxpayer may make a written average basis election electronically. The regulations provide that a customer may elect the average basis method at any time. The election takes effect for sales that occur after the election.

49. When is a taxpayer permitted to revoke an average basis election or change from the average basis method?A taxpayer may revoke an average basis election by the earlier of one year from the date of making the election or the first sale or other disposition of the stock following the election. After a revocation, the taxpayer’s stock basis is the basis before averaging. However, a taxpayer may change from the average basis method to another permissible method prospectively. The regulations do not limit the number of times or the frequency at which a taxpayer can change his or her basis determination method. Following a change, the taxpayer’s stock basis remains the same as the basis immediately before the change.

48 says the change takes effect for sales, not purchases, after the election. That means shares you sell after the change, even old ones.

49 says the basis has to stay the same, not the method. That means you can sell the shares using a different method as long as you use the old basis.

I don't think it can be any clearer. Sales means sales and basis means basis.

P.S. I know what the word prospective means. If I sell shares in March using average basis and then switch to FIFO in June, I can't go back and change my March sales to FIFO. That's what prospective means. It doesn't mean I can't change basis methods for old shares that I haven't sold yet. Prospective does mean looking forward into the future, which is why the prospective change applies to any sales occurring after the change, whether the shares were purchased before or after the change. Your method election is irrelevant and can be changed 36 times before you sell something, but once you sell it, you are locked in for the sold shares. However, that sale doesn't lock in the method for the shares you didn't sell, even if it locks in the basis. Basis is not method.

I think we are getting closer but I (and TROWE) still disagree that you can change the basis on shares already purchased and partially sold.

Here is what TROWE says:

If you change your cost basis method from Average Cost to another method after a sale or exchange of covered shares, the new cost basis method will apply only to shares purchased after the date that the change request is processed.

In other words, like I said, you buy 1000 shares, sell 100, change your cost method -- then this only applies to shares in the future (prospectively.) In other words shares 1001 to whatever can use the new method, not the old shares.

Do you agree?

fd

Last edited by FinancialDave on Wed Nov 28, 2012 7:51 pm, edited 1 time in total.

And yes I do agree that with say my lot of 1000 shares above for which I already sold 100, I can select which shares in the average lot are to be sold first (FIFO) as this is how you set up short term and long term gains -- but it does not change how you HAVE to calculate the average cost basis once you have started doing so.

FinancialDave wrote:And yes I do agree that with say my lot of 1000 shares above for which I already sold 100, I can select which shares in the average lot are to be sold first (FIFO) as this is how you set up short term and long term gains -- but it does not change how you HAVE to calculate the average cost basis once you have started doing so.

This contradicts your previous statement. If you sell some shares using the average basis method, must you continue to use the average basis method for the unsold shares that you owned at the time of the sale and that were used in the computation of the average basis?

I thought that previously you had said yes (that was your original statement):

once you have started with one cost accounting [sic] method in a fund you cannot change it.

[Actually, your original statement was stronger. You didn't even allow for a change to apply to new shares. You now seem to admit that you were wrong.]

The above seems to say no:

I can select which shares in the average lot are to be sold first (FIFO)

While you have misunderstood the term FIFO (you have no choice as to which are to be sold first, that's what first-in, first-out means), you seem, as I say, to admit you have a choice of method.

Note that calculate is not the same as choose, nor is it the same as method. Calculating an average basis is not the same as choosing the average basis method. [And the words in the regs and your irs link are average basis, not average cost basis.]

Did you read example 3 from T. Rowe Price? What do you make of the sale on 8/1/12?

The change to FIFO was made on 5/1/12, but these shares were purchased on 3/1/12 for $30. The basis for the FIFO sale is $20, not $30, because they were part of an average basis calculation used for a sale before 5/1/12. They kept the basis they had before the change of method, but they were sold using the new method, not the old method from before the change.

P.S. I believe T. Rowe Price is admitting that their computers aren't set up to handle this, even if it is legal, which is why they made the statement they did about your selection with them only applying to new shares. Plus, there is some confusion over choosing a method when you purchase shares (which is really irrelevant) and when you sell shares. You can change the former after the fact but not the latter.

The FIFO I mention is only to determine if the shares should be classified as a short term or long term gain -- nothing to do with the cost basis. Within a group of "averaged cost basis shares" you have to be able to realize both long term and short term gains, that is all I am saying. Nothing to do with the cost basis, which is what we are talking about.

sscritic wrote:You told me to read the IRS questions 48 and 49. I read them and showed you how to read them. When you first read 48 you saw

The election takes effect for sales that occur after the election.

and then came back here and reported that the election only applies to purchases after the election. Purchase is not Sale. That's all I can say.

We seem to be getting off track here - I do not think I have wavered at all. I have re-read everything about 3 times and don't know where you come up with the above unless you are mis-interpreting the quote from TROWE that has the word purchase in it?

I have given the same simple example twice and will do it once more. I will make it more personal.

June 2012 - sell 100 shares XYZ fund @$20 at the average cost basis of $15. He identifies the Jan 2011 shares as the ones to sell for a long term capital gain.

July 2012Taxpayer decides he wants to change his average cost basis method to a FIFO cost basis method.

Aug 2012 -sell 100 shares of XYZ fund -- these shares are sold at the average cost basis of $15.

The original election was made, 400 shares were purchased, some were sold, so the whole 400 shares need to be sold under the original election of average cost basis $15, even though a new basis method has been selected as of July for any new shares PURCHASED after July -- but of course the new basis method will only be applied once some new shares are sold, and sure he could change his mind 36 times before that happened, but it still has nothing to do with the original election and the 400 shares purchased under that election. This may be where you are getting hung up on the word purchase, but the key is that once some shares in the block of 400 were sold and an average calculation is done then all these share need to be sold at the same average value (ie the election CAN NOT be revoked.)

June 2012 - sell 100 shares XYZ fund @$20 at the average cost basis of $15. He identifies the Jan 2011 shares as the ones to sell for a long term capital gain.

I think I see the source of your confusion; you don't seem to know the basic rules about the average basis method and are confusing a computation with a method. Using the average basis method (not average cost basis) requires selling the first shares acquired. That's been the rule for many years. You don't get to identify the shares you want to sell if you use the average basis method.

Even though you include all unsold shares of identical stock in an account to compute average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first.

Computing and selling are two different concepts, but with the average basis method you are restricted in both.

Now let's consider your example with one modification, but use the right words.

June 2012 - sell 100 shares using the average basis method. That's a method, not a calculation. When you use the average basis method, two things happen. You compute the average basis of all the shares you currently hold, $15 as you say. Then you sell some shares, but here you have no choice as the IRS gives you no choice. The shares you sell are the January 2011 shares, so you are left with the Feb 2011, Jan 2012, and Feb 2012 shares.

July 2012 - switch basis method to Specific ID. With the Specific ID method, you get to choose which shares you want to sell (that's the ID part).

August 2012 - sell the 100 shares purchased Feb 2012. Note that these are short term shares. The basis will be $15 as previously computed, since the rule I have repeated several times is that if you change your basis method, the computed basis of the shares remains what it was before the change. Before July 2012 the basis of the Feb 2012 shares was $15 because of the averaging. After the change in method, the basis remains the same, $15.

If I had used the average basis method to sell shares in August, they would have been the shares purchased Feb 2011, as those were the first acquired of all the shares remaining, and the gain or loss would have been long term. By using the Specific ID method, I was able to sell the Feb 2012 shares (short term) instead.

The point is that I don't have to continue using the average basis method for the shares I owned but didn't sell.

P.S. You keep forgetting what you wrote:

Investor buys 1000 shares of a mutual fund, elects to use average cost method, sells 100 shares. He can no longer sell the remaining 900 shares by any method other than the one he has elected -- because he can not revoke the average method.

Certainly he can change his method on any new shares he has bought (because he has not done an average calculation on those shares.) This is what "prospectively" means.

I wrote that you said

that the election only applies to purchases after the election.

to which you responded

I have re-read everything about 3 times and don't know where you come up with the above

I got it directly from what you wrote, which I will repeat for you in its other form:

He can no longer sell the remaining 900 shares by any method other than the one he has elected

Rethinking this, you may be missing the fundamental nature of a basis method. There are two parts to a method: which shares are being sold and what is the basis of those shares. With the average basis method, the shares sold are the first ones acquired and the basis of those first shares is the average basis of all the shares you currently own. Note that basis may only be partially related to the purchase price.

Let's stick with the average basis method.Buy 100 at 10Buy 100 at 20Buy 100 at 20Buy 100 at 10Sell 100Buy 100 at 30Sell 100

At the first sell, the average basis is 15, so when you sell the first 100 you are left with 300 shares with a basis of 15. When you go to sell the second 100, you have 400 shares purchased at 20, 20, 10, and 30 respectively (average 20), but their basis is 15, 15, 15, and 30 respectively (average 18.75). The average you use, the 18.75, is not the average price of the 400 shares you own, but the average basis of the shares you own. [Hey, maybe that's why they call it average basis!]

FIFO and Specific ID methods also have two parts, and the basis of the shares sold may again be only partially related to the purchase price.

sscritic wrote:Rethinking this, you may be missing the fundamental nature of a basis method. There are two parts to a method: which shares are being sold and what is the basis of those shares. With the average basis method, the shares sold are the first ones acquired and the basis of those first shares is the average basis of all the shares you currently own. Note that basis may only be partially related to the purchase price.

Let's stick with the average basis method.Buy 100 at 10Buy 100 at 20Buy 100 at 20Buy 100 at 10Sell 100Buy 100 at 30Sell 100

At the first sell, the average basis is 15, so when you sell the first 100 you are left with 300 shares with a basis of 15. When you go to sell the second 100, you have 400 shares purchased at 20, 20, 10, and 30 respectively (average 20), but their basis is 15, 15, 15, and 30 respectively (average 18.75). The average you use, the 18.75, is not the average price of the 400 shares you own, but the average basis of the shares you own. [Hey, maybe that's why they call it average basis!]

FIFO and Specific ID methods also have two parts, and the basis of the shares sold may again be only partially related to the purchase price.

Making progress I completely agree with this. The previous post "almost"

This is last post for tonight, but I suggest you re-read the TROWE example 3 again. You asked me about it earlier, but I was on another "roll" at the time.

It seems to me that the answer to your question about the sale on 8-1 is that this sale is the last sale of the old shares acquired under the AVERAGE METHOD. As TROWE points out only new shares bought after 5-01 can be applied to the FIFO method.

Now I also do understand what you are saying about the difference between the METHOD for the basis calculation and the METHOD for identifying which shares are sold, but for the purpose of my discussion I am only talking about the Method for the basis calculation, which I believe is what the TROWE and IRS items 48 & 49 are referring to.

FIFO has two parts. You can't apply one without the other, so I don't understand your sentence about FIFO and TRP. I think I understand 48 and 49:

The election takes effect for sales that occur after the election....Following a change, the taxpayer’s stock basis remains the same as the basis immediately before the change.

That's it. Those are the rules. Note that the word purchased (or bought) doesn't appear anywhere in 48 and 49. You can't keep talking about the purchase date when it is irrelevant. The purchase date is only used for identifying the particular shares that were sold, not for anything else.

TRP used average basis. They elected to change to FIFO. FIFO was used for sales that occurred after the change (see 48). The basis that was used was the one that existed immediately before the change (see 49). I don't think it could be simpler. A sale is one thing; a basis is another.

There is no FIFO method for computing basis as you seem to imply

only new shares bought after 5-01 can be applied to the FIFO method.

I actually don't know what applying shares to a method means; most people apply methods to shares. I assumed that is what you meant to write, but it still makes no sense. FIFO as a method sells the first share acquired that you still own and the basis of that share is the basis of that share; there is no FIFO computational method for determining the basis.

FinancialDave wrote:Ok, let's stick with one topic at a time.The FIFO method is pretty well defined on the TRP website, inside the table labeled as COST BASIS METHODS as:

Assets aquired first are sold first. Purchase Price of specific shares sold=Cost of Shares Sold.

TRP is not the IRS. The statement you quote is wrong.

Buy 100 shares at 80.

Sell 100 shares at 60.

10 days later buy 80 shares at 50.

Two months later sell 60 shares using FIFO. The basis is not 50.

This assumes that the words "Cost of Shares Sold" means basis. If it literally means "cost of shares sold," then it is a tautology. Yes, the price I pay for what I buy is the price I pay for what I buy. Now perhaps they are referring to column (f) of form 8949, which is labeled (f) "Cost or other basis" (not cost of shares sold). Note the word basis. The IRS wants your basis, not what you paid for your shares, that is, not unless your basis is the cost of your shares. Cost is not directly relevant, as you know from our average basis example. Your basis is often not your cost or what you paid. The IRS wants your basis, nothing else.

P.S. I only brought up TRP for that one example, showing that you could switch from average cost to FIFO. All that was in the regulations and the IRS 48 and 49, but you didn't read them the way I and TRP did. TRP is not the authority, but just another voice that agrees with me that the IRS and the regulations say you can switch basis methods from average basis to another basis method for future sales.

So now you are also saying TRP is also wrong? I don't see why the TRP example is so hard to see. They basically come right out and say that the 30 shares bought under the AVERAGE COST BASIS METHOD must be sold under that Method and only NEW shares purchases are sold under the NEW method (which in this case is FIFO COST basis method.)

Your reading skills are your reading skills and they aren't likely to change. If you like a fun read, read the regulations for yourself. Or read 48 and 49 again and don't add words like bought and purchase that aren't there. The end.

I don't think I'm reading anything into it when I say the election (of the average cost basis method) applies to all shares PURCHASED, once the election becomes non-revocable (either one year passes or you sell a share of the lot you have purchased).

In other words it says pretty clearly that you don't have to SELL any shares at all - if you wait two years and don't change the election, ALL the shares that fall under the election have to be sold under that election (AVERAGE COST BASIS METHOD) - ie the election cannot be revoked.

Furthermore in #49 when the IRS uses the term prospectively, they do not say sales or purchases, but purchases MUST be implied because they just said all the OLD shares are "locked" into the AVERAGE COST BASIS METHOD (method cannot be revoked or changed).

It's been fun. Truly I think we both know how to calculate the basis, the "IRS speak" however seems to be the issue.